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Trading Lessons

CIPS, Not The Petrodollar Is Key

Stock-Markets / Financial Markets 2016 Jan 20, 2016 - 04:56 PM GMT

By: Raymond_Matison

Stock-Markets

With oil prices having declined to record lows of the last several decades and financial markets having traded down dramatically, there is increased interest in identifying the next possible black swan event.

Over the last several years, there have been scores of articles forecasting a fall of the Petrodollar as the key confirming event for the long-expected decline in value of the United States dollar currency and the demise of its global hegemony.  These reports are correct in that unraveling the Petrodollar will precipitate a sudden decline in global demand for the dollar, with a concomitant decline in the value of the dollar in global currency markets. 


However, waiting for a specific black swan event is similar to purchasing lottery tickets. Someone will win the pot eventually, but the winning ticket will likely contain numbers that you neither chose nor purchased.  So it is likely that the event which will start a new and persistent decrease for the global demand of the dollar, and a more precipitous decline in its value will in fact come from a less recognized or acknowledged event.  Specifically, this event of the dollar’s decline in value may not come from the direct unraveling of the Petrodollar, but from some other associated event.  In addition, we can rely on the fact that our government is doing everything it can to perpetuate the Petrodollar’s current status, and with its almost unlimited resources the time for its ultimate unraveling is nearly impossible to predict.

However, I believe that a visible black swan has been swimming in front of us all this time, and that those who have followed international developments have at least subconsciously understood the more likely and visible reason for the eventual unraveling of the U.S. global reserve currency.  This huge pink elephant in our global living room is the effort to finalize into active operation CIPS (China International Payment System) a competing electronic money transfer system to SWIFT (Society of World Interbank Telecommunications).

China has been working on this independent money transfer system for several years (as has Russia), and it has been in a testing phase during 2015 to make sure that it functions properly and dependably.  Indeed, there were expectations that this system might come on-stream in the last quarter of 2015.  Once the seemingly benign announcement is made that this system is an operating every-day reality, the world will start to change noticeably and irreversibly every day.  In other words, whether there is turmoil in the mid-east or not, whether the Petrodollar still rules or not, whether oil flows, or is sold at low prices or not, whether geopolitical conflicts are resolved or not – this new global payments system would still be changing the balance of world power irreversibly day by day.

As this alternative money transfer system gets up and running, some of the global trade now being settled through the SWIFT system would start to be transferred over to CIPS.  Over time, this fact alone would decrease demand for the dollar as the SWIFT system’s transaction volume would decline, and the small initial base of transactions through CIPS would grow.  As more countries determine that this system is reliable, price competitive and reasonably safe from cyber-warfare, many countries would increasingly use CIPS rather than SWIFT.  The U.S. and Europe clearly will continue predominantly to use the SWIFT system, but countries that have reason, imagined or real, to distrust western nations will clearly more frequently use the alternative.

Countries which have been at the wrong end of an IMF or World Bank defaulted loan renegotiation, or countries which have suffered from western sanctions, including exclusion from the SWIFT system for international trade settlement, are going to embrace the CIPS system.  Countries which suspect or believe that foreign country derivative use has manipulated their currency lower in foreign exchange markets causing economic havoc at home will likely avoid dollar transactions, and settle their trade balances through CIPS in other currencies. 

This action will tend to polarize the world into two distinct factions.  As one group of countries utilizes, and increasingly relies on this alternative electronic payments system, the less influence the Petrodollar or the U.S. global reserve currency will wield.  In other words, the Petrodollar can become increasingly irrelevant not because of a singular or series of dramatic geopolitical events but simply as a result an alternative system to SWIFT for settling trade.

As a more broadly encompassing concept, we can assume countries identified frequently by the acronym BRICS (Brazil, Russia, India, China, and South Africa) will predominantly choose to use the CIPS system.  Because of current political developments as related to Iran, and China’s increased activities in South America, the currently more appropriate acronym should be CRISIS (China, Russia, India, South America, Iran, and South Africa). See the article: BRICS? No, CRISIS, posted http://www.marketoracle.co.uk/Article53009.html.   As these countries include a majority of the world’s population, their ultimate influence from the use of CIPS will be significant.

Therefore, it is entirely possible, that instead of the Petrodollar becoming undone because of some decision by OPEC countries or some of their changing leaders, or by Russia or China negotiating some oil trade agreement which unravels the agreement between the U.S. and Saudi Arabia – it is the very visible implementation of this alternative electronic money transfer system that gradually makes for a reduced level of demand for SWIFT and its dominant U.S. dollar currency.  Accordingly, the dollar does not fall precipitously from a singular dramatic event, but recedes in value over a several year period. We must keep in mind, however, that this scenario does not exclude likely dramatic geopolitical actions by the world’s competing countries, each with their own distinct consequences.

It is this increased usage of the CIPS system that would become the Achilles heel of the Petrodollar.  Like it or not, the CIPS system is becoming a reality, just as real as is the recent establishing of the New Development Bank (NDB), and Asian Infrastructure and Investment Bank (AIIB) as competitors or alternates to the IMF and World Bank.  It is just a matter of waiting for the official announcement for CIPS becoming fully operational.  Accordingly, the unilateral global dominance by the U.S. with its “exorbitant currency privilege” in printing unlimited dollars, and lending to developing countries in U.S. dollars - which have to repay such loans more dearly through currency devaluations stemming from questionable foreign exchange market action will be reduced - and over the long term eventually eliminated altogether.

So, perhaps we really don’t need to be searching for the black swan event.  We have a clearly visible swan that has been parading itself in front of us all this time.  Its activities and effect are understandable to all, and they make perfect sense. Countries want to determine their own development and future without dominating or manipulating outside forces.  Choice is usually better than no choice.  Two global money transfer systems are better than one, with competition maintaining the integrity of both.  The SWIFT system worked well for years in context of its intended original role of facilitating global trade, but this alternative system became necessary because of improper manipulation of the first system for geopolitical purposes. 

The world has always had an abundance of people who want to control their own or other countries as well as the lives of countless ordinary citizens.  Their prevalence is neither a surprise nor a black swan.  With the advent of the Internet, or call it the second coming of the printing press which liberated people centuries ago with information through books - people are now able to transmit information instantaneously, making despotism more difficult to hide and easier to combat. There is a great prospect for a much improved and fairer world in the future due to this quicker global sharing and exchange of important ideas, theories and ubiquitous information.  But this evolution will first have to establish competing political and financial systems which provide an ability to avoid or starve current systems which were the best and most innovative systems at the time of their introduction, but which over decades of political polarization have become unfair, coercive and anti-democratic.

The world does not necessarily have to repeat its devastating experience of the 1930-1940’s wherein financial collapse of Germany and the rest of Europe gave way to dictators and a destructive world war. Our improved instantaneous sharing of information means that we are forewarned about the very dangerous path we all are on with money creation and fiat currencies, political fiscal irresponsibility fostering frightening levels of government and consumer debt, destructive cultural policies, and disappearing moral values.  Given our grievous excesses and social misdirection of the last several decades it is clear that we will have to wade through the valley of black swans. Beyond it, however, there is the potential of a renaissance for humanity similar to that experienced after the introduction of the modern printing press – a world of individual liberty, stable money, less corrupted government, and beautiful white swans.

Raymond Matison

Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience.  First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics.  He can be e-mailed at rmatison@msn.com
Copyright © 2065 Raymond Matison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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